A Termination Fee is a payment made by the target to the acquirer in the event of the target deciding not to consummate the deal or as otherwise specified in the merger agreement (see below). Although this fee is commonly referred to as a “Breakup fee”, there is rarely any mention of this terminology in official documents (see example below). The fee is contrasted with the Reverse Termination Fee.
This specified provision within the merger agreement motivates the seller to close a pending deal. A company might pay the fee if it decides not to sell to the original purchaser and instead sells to a competing bidder with a more attractive superior offer, although the cost of the termination fee will be taken into account. Likewise, the fee can discourage other companies from bidding for the target as they would have to factor in the fee as part of their cost. Fees often range between 2.5% – 3.5% of the deal value.
Termination Fee Example
The following passage is taken from an 8-K filing made by Forescout Technologies (FSCT) on February 7, 2020
The Merger Agreement contains certain termination rights for the Company and Parent. Upon termination of the Merger Agreement under specified circumstances, the Company will be required to pay Parent a termination fee of $55,832,270. Specifically, if the Merger Agreement is terminated by (1) Parent, if the Board changes its recommendation with respect to the Merger, (2) Parent, if the Company breaches or fails to perform, in accordance with the Merger Agreement, in any material respect its obligations under the alternative acquisition solicitation provisions in the Merger Agreement, or (3) the Company, if the Board authorizes the acceptance of a superior proposal and such proposal was not solicited in breach of the alternative acquisition solicitation provisions in the Merger Agreement, then, in each case, the termination fee will be payable by the Company to Parent upon termination. However, under certain circumstances as described in the Merger Agreement, if the Company terminates the Merger Agreement to enter into a superior proposal with an Excluded Party (as such term is defined in the Merger Agreement), then the amount of the termination fee payable to Parent will be $37,221,513. The termination fee will also be payable in certain circumstances if (1) the Merger Agreement is terminated because the Merger is not completed by June 6, 2020 (subject to extension to August 6, 2020, under certain circumstances as set forth in the Merger Agreement), the Company’s failure to obtain the required approval of its stockholders or because of a material breach of the Company’s representations, warranties or covenants in a manner that would cause the related closing conditions to not be satisfied, (2) prior to such termination (but after the date of the Merger Agreement) a proposal, generally speaking, to acquire at least 50% of the Company’s stock or assets is publicly announced or disclosed by a third party and (3) the Company subsequently consummates, or enters into a definitive agreement providing for, a transaction involving the acquisition of at least 50% of its stock or assets within one year of such termination.
The proposed value of the deal is $1.9bn. Thus, the termination fee payable, should the target break the deal is approximately 3%.
